Memory Market Weak, But Handsets A Bright Spot

The memory downturn continues as a result of weak demand, oversupply, and price wars, with many memory vendors struggling with losses. Leading chipmaker Micron Technology Inc. (NYSE:MU) recently reported its tenth straight quarterly loss. Even the semiconductor sector looked gloomy as National Semiconductor (NYSE:NSM) reported its first loss in six years. Let’s take a closer look.

On June 25, Micron (MU), a leading memory chipmaker with annual revenue of $5.8 billion, reported third quarter revenue of $1.1 billion, down 26% y-o-y but up 11% sequentially. Net loss was $290.0 million, or $0.36 per share versus $236 million, or $0.30 per share last year and $751 million or $0.97 per share last quarter. The company had an expense of $30 million related to plants that weren’t running at full capacity. Analysts expected losses of $0.43 per share on revenue of $1.18 billion. Q2 coverage is available here.

Revenue from sales of DRAM products increased 14% sequentially to $553 million due to an increase in  DRAM sales volumes. Revenue from sales of NAND Flash products was $426 million, flat sequentially due to a 20% increase in NAND sales volumes offset by lower ASPs to Intel, Micron’s IM Flash JV partner. NAND ASPs decreased 17% on average, but for customers other than Intel, ASPs increased by 13%. Imaging revenue increased 23% sequentially to $127 million, signalling perhaps a bottoming out of demand in the mobile markets. Micron plans to sell a majority interest in its imaging solutions business, Aptina Imaging Corporation, to Riverwood Capital and TPG Capital in Q4. A write-down charge of $53 million associated with the sale is included in Q3 net losses.

Micron has reduced its workforce and shut down its Idaho-based capacityto bring down its cost of production. As per-gigabit manufacturing costs decreased, Micron’s gross margin in the quarter improved from negative 30% last quarter to positive 11%. The company ended the third quarter with $1.3 billion in cash. Cash flow from operating activities was $151.0 million. Samsung and Micron are the only two companies in the sector who are managing to generate cash from operating activities.

The memory market went into an overdrive in 2006 and 2007 with many vendors spending to increase their production capacity. Now, falling prices, weak demand and oversupply in the sector have changed the scenario and deepened the memory downturn. Samsung, the market leader with the lowest cost of production is well ahead of the pack with its iPhone contract. It also a strong presence in the handset market to balance its act.  On the other hand, Micron is expected to benefit from the rollout of Microsoft Windows 7 in October.

However, the rest of the pack is struggling with losses — No.2 Hynix reported an even greater loss than Micron. Many Taiwanese companies are on the edge of bankruptcy while Qimonda has already filed for bankruptcy. Micron had earlier acquired Qimonda’s 35.6% stake in Inotera Memories for $400 million. Inotera has not produced any products for Micron to date. Semiconductor analysts are calling for consolidation in the industry to restore profitability in the sector — Samsung and Micron are in a relatively better position than peers to undertake this mission.

Micron is currently trading around $5 with market cap of about $4 billion. The stock hit a 52-week high of $5.93 on June 10.

On the other hand, on June 11 National Semiconductor, a leader in analog power management technology, reported fourth quarter and fiscal year 2009 results that beat estimates. Annual revenue in 2009 was $1.46 billion compared to $1.89 billion in fiscal 2008. Net income in 2009 was $73 million versus $332 million in 2008.

Q4 revenue was down 39% y-o-y and 4% sequentially to $281 million. Net loss was $64 million or $0.28 per share including $116 million of restructuring and asset impairment charges compared to net income of $83.2 million, or $0.34 per share. Analysts estimated a loss of $0.38 per share.

Gross margin was 58.3%, up from 57.5% last quarter and down from 65.9% in Q408. This sequential improvement in gross margin was primarily driven by headcount reductions and cost savings from the closure of the company’s plants in Suzhou, China and in Texas. It ended the quarter with $700 million in cash.

Bookings in the quarter grew for the first time in four quarters by 30% over Q3, driven by increased orders from manufacturers of wireless handsets. Sales to the mobile phone handset market grew by about 6% sequentially and bookings from these mobile phone handset customers also grew by about 50% sequentially.

For the first quarter, National Semiconductor expects revenue to range from $285 to $305 million, or an increase of 2 to 9% sequentially. The stock is currently trading around $12 with market cap of about $3 billion.